Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended November 30, 2006

or

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____ to ____

Commission File Number: 0-261

Alico, Inc.

(Exact name of registrant as specified in its charter)

Florida

59-0906081

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

P.O. Box 338, LaBelle, FL

33975

(Address of principal executive offices)

(Zip Code)

Registrants telephone number, including area code: 863-675-2966

N/A(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated file o

Accelerated filer þ

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

oYes þ No

There were 7,374,926 shares of common stock, par value $1.00 per share, outstanding at January 3, 2007.

The following unaudited condensed financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and regulations. The
Company believes that the disclosures made are adequate to make the information not misleading.

The accompanying unaudited condensed consolidated financial statements have been prepared on a
basis consistent with the accounting principles and policies reflected in the Companys annual
report for the year ended August 31, 2006. In the opinion of Management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of its consolidated financial position at
November 30, 2006 and the consolidated results of operations for the three month periods ended
November 30, 2006 and 2005, and the consolidated cash flows for the three month periods ended
November 30, 2006 and 2005.

The Company is involved in agriculture, which is of a seasonal nature and subject to the influence
of natural phenomena and wide price fluctuations. Fluctuation in the market prices for citrus fruit
has caused the Company to recognize adjustments to revenue from the prior years crop totaling ($20
thousand) for the quarter ended November 30, 2006, and $418 thousand for the quarter ended November
30, 2005.

The results of operations for the stated periods are not necessarily indicative of results to be
expected for the full year. Certain items from 2005 have been reclassified to conform to the 2006
presentation.

2.

Real Estate:

Real estate sales are recorded under the accrual method of accounting. Under this method, a sale is
not recognized until certain criteria are met including whether the profit is determinable,
collectibility of the sales price is reasonably assured and the earnings process is complete.

In November 2005, the Company sold approximately 280 acres of citrus grove land located south of
LaBelle, Florida in Hendry County for $5.6 million cash in escrow. The Company retained operating
rights to the grove until residential development begins. The Company recognized a net profit on
the sale of $4.4 million.

In May 2006, the Company purchased a 523 acre riverfront mine site for rock and fill for $10.6
million cash. The Company has allocated approximately 54% of the purchase price to the rock and
sand reserves with the remaining 46% of the purchase price allocated as residual land value based
on the present value of the expected rock royalties over 20 years and the expected residual value
of the property after that time. Rock and sand reserves will be depleted and charged to cost of
goods sold proportionately as the property is mined. Depletion expense recognized during the three
months ended November 30, 2006 was $22 with $0 expense in 2005 for that same period.

3.

Marketable Securities Available for Sale:

The Company has classified 100% of investments in marketable securities as available for sale and,
as such, the securities are carried at estimated fair value. Unrealized gains and losses determined
to be temporary are recorded as other comprehensive income, net of related deferred taxes, until
realized. Unrealized losses determined to be other than temporary are recognized in the period the
determination is made.

The cost and estimated fair value of marketable securities available for sale at November 30, 2006
and August 31, 2006 were as follows:

The aggregate fair value of investments in debt instruments (net of
mutual funds of $150) as of November 30, 2006 by contractual maturity date, consisted of the
following:

Aggregate

Fair Value

Due within 1 year

$

13,563

Due between 1 and 2 years

10,338

Due between 2 and 3 years

4,570

Due between 3 and 4 years

212

Due between 4 and 5 years



Due beyond five years

14,515

Total

$

43,198

The following table shows the gross unrealized losses and fair value of the Companys
investments with unrealized losses that are not deemed to be other than temporarily impaired,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, at November 30, 2006.

November 30, 2006 (unaudited)

Less than 12 months

12 months or greater

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

Fixed maturity funds

3,509

3





3,509

3

Corporate bonds

2,537

16

6,004

29

8,541

45

Total

$

6,046

$

19

$

6,004

$

29

$

12,050

$

48

Net realized (loss) gains on the sale of securities for the three months ended November 30, 2006
and 2005 were $(52 thousand) and $3.3 million, respectively.

Debt instruments and funds. The unrealized losses on fixed maturity funds and corporate bonds were
primarily due to changes in interest rates. At November 30, 2006 the Company held loss positions in
34 debt instruments. Because the decline in market values of these securities is attributable to
changes in interest rates and not credit quality and because the Company has the ability and intent
to hold these investments until a recovery of fair value, which may be maturity, the Company does
not believe any of the unrealized losses represent other than temporary impairment based on the
evaluation of available evidence as of November 30, 2006.

Mortgage and notes receivable arose from real estate sales. The balances are
as follows:

November 30,

2006

August 31,

(unaudited)

2006

Mortgage notes receivable on retail land sales

$

372

$

427

Mortgage notes receivable on bulk land sales

56,610

56,610

Total mortgage and notes receivable

56,982

57,037

Less: Deferred revenue

(42,783

)

(43,230

)

Discount on note to impute market
interest

(2,595

)

(2,783

)

Current portion

(3,230

)

(47

)

Non-current portion

$

8,374

$

10,977

Real estate sales are recorded under the accrual method of accounting. Gains from commercial
or bulk land sales are not recognized until payments received for property to be developed within
two years after the sale equal 20% or property to be developed after two years equal 25%, of the
contract sales price according to the installment sales method.

Profits from commercial real estate sales are discounted to reflect the market rate of interest
where the stated rate of the mortgage note is less than the market rate. The recorded imputed
interest discounts are realized as the balances due are collected. In the event of early
liquidation, interest is recognized on the simple interest method.

In December 2006, the Companys subsidiary, Alico-Agri, Ltd. restructured two contracts in
connection with the sale of property in Lee County, Florida. The original contracts were entered
into in 2001 and 2003, respectively, for approximately 5,609 acres near Bonita Springs, Florida.
The Company received $7.5 million upon execution of the restructured agreements.

Under the terms of the first renegotiated contract, $3.8 million of the closing proceeds were
applied to the existing mortgage receivable principal of $56.6 million. Four annual principal plus
interest payments of the remaining $52.8 million mortgage will commence with a payment of $13.6
million on September 28, 2007. The interest rate was renegotiated from 2.5% annually up to 4.0%
annually.

The Companys unharvested sugarcane and cattle are partially uninsured.

Hurricane Wilma, a category three hurricane swept through southwest Florida in October 2005.
The hurricane caused extensive damage to the Companys crops and infrastructure in Collier and
Hendry Counties. The Company recognized casualty losses resulting from damages to inventory from
the hurricane as follows: (see also note 15)

November 30,

November 30,

2006

2005

(unaudited)

(unaudited)

Unharvested citrus

$



$

3,448

Unharvested sugarcane



3,010

Unharvested vegetables



147

Total inventories

$



$

6,605

The Company records its inventory at the lower of cost or net realizable value. Due to
changing market conditions, the Company determined that certain of its inventories at November 30,
2006 had accumulated costs in excess of the estimated net realizable value. As a result, the
Company recorded losses of $338 and $216 for its sugarcane and vegetables, respectively, during the
three months ended
November 30, 2006; and $834, $85 and $346 for its sugarcane, sod and plants, respectively, during
the three months ended November 30, 2005. The adjustments were included in cost of sales for the
quarters ended November 30, 2006 and 2005.

The (benefit) provision for income taxes for the three months ended November 30, 2006 and 2005 is
summarized as follows:

Three months ended

November 30,

(unaudited)

2006

2005

Current:

Federal income tax

$

(768

)

$

497

State income tax

(131

)

53

(899

)

550

Deferred:

Federal income tax

(34

)

87

State income tax

50

9

16

96

Total (benefit) provision for income taxes

$

(883

)

$

646

The Internal Revenue Service (IRS) issued a thirty day letter dated August 14, 2006 pertaining
to ongoing audits of Alico for the tax years 2000 through 2004. The letter proposes changes to the
Companys tax liabilities for each of these tax years and required the Company either a) to agree
with the changes and remit the specified taxes and penalties, or b) to submit a rebuttal within 30
days. The Company sought and received an extension of time to submit its protest and timely
submitted the protest on October 13, 2006.

In the thirty day letter, the IRS proposed several alternative theories as a basis for its argument
that Alico should have reported additional taxable income in the years under audit. These theories
principally relate to the formation and capitalization of the Companys Agri Insurance subsidiary
and its tax exempt status during the years under audit. Under the theories proposed, the IRS has
calculated additional taxes and penalties due ranging from a minimum of $35.4 million dollars to a
maximum of $86.4 million dollars. The letter does not quantify the interest on the proposed taxes.

The Company does not accept the IRS position and intends to continue to oppose vigorously any
attempt by the IRS to impose such assessment in connection with the Agri Insurance matter. However,
because Management believes it is probable that a challenge will be made and probable that the
challenge may be successful as to some of the assertions, Management has provided for the
contingency. During the
quarter ended November 30, 2006, the Company adjusted its liability accrual by $392 thousand. The
adjustment was charged to the Companys first quarter tax provision. The Company has accrued a
total liability of $20.7 million and $20.3 million at November 30, 2006 and August 31, 2006,
respectively, for the contingency.

Since January 1, 2004 Agri has been filing as a taxable entity. This change in tax status is a
direct result of changes in the Internal Revenue Code increasing premium and other annual income
levels. Due to these changes, Agri no longer qualifies as a tax-exempt entity.

Alico, Inc. has a Credit Facility with a commercial lender that provides a $175.0 million revolving
line of credit which matures on August 1, 2010. Funds from the Credit Facility may be used for
general corporate purposes including: (i) the normal operating needs of the Company and its
operating divisions, (ii) the purchase of capital assets and (iii) the payment of dividends. The
Credit Facility also allows for an annual extension at the lenders option.

Under the Amended Credit Facility, revolving borrowings require quarterly interest payments at
LIBOR plus a variable rate between 0.8% and 1.5% depending on the Companys debt ratio. The
Amended Credit Facility is partially collateralized by mortgages on two parcels of agricultural
property located in Hendry County, Florida consisting of 7,672 acres and 33,700 acres.

Under the Credit Facility an event of default occurs if the Company fails to make the payments
required of it or otherwise fails to fulfill the provisions and covenants applicable to it. In the
event of default, the Credit Facility shall bear an increased interest rate of 2% in addition to
the then-current rate specified in the Credit Facility; the lender may alternatively at its option,
terminate its revolving credit commitment and require immediate payment of the entire unpaid
principal amount of the Credit Facility, accrued interest and declare all other obligations
immediately due and payable. The Company is currently in compliance with all of the covenants and
provisions of the Credit Facility.

The Credit Facility contains numerous restrictive covenants including those requiring the Company
to maintain minimum levels of net worth, retain certain debt, current and fixed charge coverage
ratios, and sets limitations on the extension of loans or additional borrowings by the Company or
any subsidiary.

Interest costs expensed and capitalized to property, buildings and equipment were as follows:

Three months ended

November 30,

(unaudited)

2006

2005

Interest expense

$

1,183

$

991

Interest capitalized

10

17

Total interest cost

$

1,193

$

1,008

8.

Other non-current liability:

Alico formed a wholly owned insurance subsidiary, Agri Insurance Company, Ltd. (Bermuda) (Agri)
in June of 2000. Agri was formed in response to the lack of insurance availability, both in the
traditional commercial insurance markets and governmental sponsored insurance programs, suitable to
provide coverage for the increasing number and potential severity of agricultural events. Such
events include citrus canker, crop diseases, livestock related maladies and weather. Alicos goal
included not only pre-funding its potential exposures related to the aforementioned events, but
also to attempt to attract new underwriting capital if it is successful in profitably underwriting
its own potential risks as well as similar risks of its historic business partners.

Alico capitalized Agri by contributing real estate located in Lee County Florida. The real estate
was transferred at its historical cost basis. Agri received a determination letter from the
Internal Revenue Service (IRS) stating that Agri was exempt from taxation provided that net premium
levels, consisting only of premiums with third parties, were below an annual stated level ($350
thousand). Third party premiums have remained below the stated annual level. As the Lee County real
estate was sold, substantial gains were generated in Agri, creating permanent book/tax differences.

The Internal Revenue Service (IRS) issued a thirty day letter dated August 14, 2006 pertaining to
ongoing audits of Alico for the tax years 2000 through 2004. The letter proposes changes to the
Companys tax liabilities for each of these tax years and required the Company either a) to agree
with the changes and remit the specified taxes and penalties, or b) to submit a rebuttal within 30
days. The Company sought and received an extension of time to submit its protest and timely
submitted the protest on October 13, 2006.

In the thirty day letter, the IRS proposed several alternative theories as a basis for its argument
that Alico should have reported additional taxable income in the years under audit. These theories
principally relate to the formation and capitalization of the Companys Agri Insurance subsidiary
and its tax exempt status during the years under audit. Under the theories proposed, the IRS has
calculated additional taxes and penalties due ranging from a minimum of $35.4 million dollars to a
maximum of $86.4 million dollars. The letter does not quantify the interest on the proposed taxes.

The Company does not accept the IRS position and intends to continue to oppose vigorously any
attempt by the IRS to impose such assessment in connection with the Agri Insurance matter. However,
because Management believes it is probable that a challenge will be made and probable that the
challenge may be successful as to some of the assertions, Management has provided for the
contingency. The Company has accrued a liability of $20.7 million and $20.3 million as of November
30, 2006 and August 31, 2006, respectively, for the contingency.

At its meeting on September 30, 2006 the Board of Directors declared a quarterly dividend of $0.275
per share payable to stockholders of record as of December 31, 2006 with payment expected on or
around January 15, 2006.

10.

Disclosures about reportable segments:

The Company has four reportable segments: Bowen, Citrus Groves, Sugarcane and Cattle. Bowen
provides harvesting and marketing services for citrus producers including Alicos Citrus Grove
division. Additionally, Bowen purchases citrus fruit and resells the fruit to citrus processors
and fresh packing facilities. The Citrus Groves segment produces citrus fruit for sale to citrus
processors and fresh packing facilities. The Sugarcane segment produces sugarcane for delivery to
the sugar mill and refinery. The Cattle division raises beef cattle for sale to western feedlots
and meat packing facilities. The goods and services produced by these segments are sold to
wholesalers and processors in the United States who prepare the products for consumption. The
Companys operations are located in Florida.

Although the Companys Plant World, Vegetable and Sod segments do not meet the quantitative
thresholds to be considered as reportable segments, information about these segments may be useful
and has been included in the schedules below. For a description of the business activities of the
Plant World, Vegetables and Sod segments please refer to Item 1 of the Companys annual report on
Form 10-K for the year ended August 31, 2006.

The accounting policies of the segments are the same as those described in the summary of
significant accounting policies in the Companys annual report on Form 10-K for the year ended
August 31, 2006. The Company evaluates performance based on profit or loss from operations before
income taxes not including nonrecurring gains and losses.

The Company accounts for intersegment sales and transfers as if the sales or transfers were to
third parties, that is, at the then current market prices.

The Companys reportable segments are strategic business units that offer different products. They
are managed separately because each business requires different knowledge, skills and marketing
strategies.

On November 3, 1998, the Company adopted the Alico, Inc., Incentive Equity Plan (the Plan)
pursuant to which the Board of Directors of the Company may grant options, stock appreciation
rights, and/or restricted stock to certain directors and employees. The Plan authorized grants of
shares or options to purchase up to 650,000 shares of authorized but unissued common stock. Stock
options granted have a strike price and vesting schedules that are at the discretion of the Board
of Directors and are determined on the effective date of the grant. The strike price cannot be less
than 55% of the market price. No stock options were granted during fiscal years 2006 and 2005 or
the quarter ended November 30, 2006.

During fiscal year 2006, the Company adopted SFAS 123R, which revised Statement of Financial
Accounting Standard No. 123 Share-Based Payment. SFAS 123R requires companies to measure the cost
of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. The cost is to be recognized over the period during which an
employee is required to provide service in exchange for the award (usually the vesting period).
The grant date fair value of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those instruments (unless
observable market prices for the same or similar instruments are available). If an equity award is
modified after the grant date, incremental compensation cost will be recognized in an amount equal
to the excess of the fair value of the modified award over the fair value of the original award
immediately before the modification.

A summary of option activity under the Plan is as follows:

Weighted average

remaining

Shares Under

Weighted average

contractual

Option

exercise price

life (in years)

Options outstanding,
August 31,2005

16,371

$

18.05

8

Granted



Exercised

7,213

18.55

Options outstanding,
August 31,2006

9,158

$

17.66

7

Granted



Exercised





Options outstanding,
November 30, 2006

9,158

$

17.66

7

At November 30, 2006 and August 31, 2006, there were 9,158 options fully vested and exercisable and
292,844 shares available for grant. The 9,158 options outstanding as of November 30, 2006 and
August 31, 2006 had a fair value of $366 thousand and $382 thousand, respectively. There was no
unrecognized compensation expense related to outstanding stock option grants at November 30, 2006
or August 31, 2006. In fiscal year 2006, 7,213 options were exercised having a total fair value of
$259 thousand.

In fiscal year 2006, the Company began granting restricted shares to certain key employees as long
term incentives. The payment of each installment is subject to continued employment with the
Company. At November 30, 2006 and August 31, 2006, there were 4,000 restricted shares vested in
accordance with these grants.

The shares granted in April 2006 vest 25% in April 2010 and 25% annually thereafter until fully
vested. The shares granted in July 2006 vest 25% in July 2010 and 25% annually thereafter until
fully vested. The shares granted in October 2006 vested 20% effective August 31, 2006 and 20%
annually thereafter until fully vested. Following the guidelines established in FAS 123R, the
Company is recognizing compensation cost equal to the fair market value of the stock at the grant
dates prorated over the vesting period of each award. The fair value of the unvested restricted
stock awards was $2.8 million at November 30, 2006 and $2.9 million at August 31, 2006,
respectively and will be recognized over a weighted average period of 6 years.

Other comprehensive income, arising from market fluctuations in the Companys securities portfolio,
was as follows:

Three Months ended

November 30,

2006

2005

Accumulated Other Comprehensive (loss) Income
at beginning of period

$

(29

)

$

2,195

Change resulting from market fluctuations,
net of tax, and realized gains and losses

40

(2,409

)

Other Comprehensive Income (Loss) at end of period

$

11

$

(214

)

13.

New Accounting Pronouncements:

In June 2006, the FASB issued FASB Interpretation Number 48 (FIN 48), Accounting for Uncertainty
in Income Taxesan interpretation of FASB Statement No. 109. The interpretation contains a two
step approach to recognizing and measuring uncertain tax positions accounted for in accordance with
SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or litigation processes, if any. The
second step is to measure the tax benefit as the largest amount which is more than 50% likely of
being realized upon ultimate settlement. The Company is required to adopt FIN 48 at the beginning
of fiscal year 2008. The Company is evaluating the impact this statement will have on its
consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements. The Company is required
to adopt SFAS No. 157 effective at the beginning of fiscal year 2009. The Company is evaluating
the impact this statement will have on its consolidated financial statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158
requires an employer to recognize the over funded or under funded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in which the changes
occur through
comprehensive income. SFAS No. 158 also requires an employer to measure the funded status of a
plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS
No. 158 will be effective for the fourth quarter of the Companys fiscal year 2007. The Company is
evaluating the impact this statement will have on its consolidated financial statements.

During January 2007, Alico announced that its Board of Directors has authorized the repurchase of
up to 100,000 Shares of the Companys common stock through August 31, 2010 for the purpose of
funding restricted stock grants under its 1998 Incentive Equity Plan in order to provide restricted
stock to eligible Senior Managers to align their interests with those of the Companys
shareholders.

The stock repurchases will be made on a quarterly basis between now and August 31, 2010 through
open market transactions, at times and in such amounts as the Companys broker determines subject
to the provisions of a 10b5-1 Plan which the Company has adopted for such purchases. The timing and
actual number of shares repurchased will depend on a variety of factors including price, corporate
and regulatory requirements and other market conditions. All purchases will be made subject to
restrictions of Rule 10b-18 relating to volume, price and timing so as to minimize the impact of
the purchases upon the market for the Companys Shares. The Company does not anticipate that any
purchases under the Plan will be made from any officer, director or control person. There are
currently no arrangements with any person for the purchase of the Shares. The Company will use
internally generated funds to make the purchases. The Company had previously announced the
repurchase of 31,000 shares in order to fund its Director
Compensation plan. The repurchases announced in January 2007, will
bring the total shares yet to be purchased to approximately 115,000.

15.

Casualty Losses:

Hurricane Wilma caused extensive damage to the Companys crops and infrastructure in Collier and
Hendry Counties during the first quarter of fiscal year 2006. Also, citrus canker was confirmed in
several groves in 2006 and 2005. Citrus canker is a highly contagious bacterial disease of citrus
that causes premature leaf and fruit drop. Citrus canker causes no threat to humans, animals or
plant life other than citrus. Prior to January 10, 2006, Florida law required infected and exposed
trees within 1,900 feet of the canker find to be removed and destroyed.

The Company recognized losses resulting from the hurricanes and canker as follows:

For the three months ended

November 30,

2006

2005

Inventoried costs

$



$

6,605

Basis of property and equipment



1,969

Insurance proceeds received



(2,158

)

Insurance reimbursements receivable



(709

)

Net casualty loss

$



$

5,707

16.

Subsequent Event:

At its meeting on September 28, 2006, the Board declared a regular quarterly dividend of $0.275 per
share payable to shareholders of record as of December 29, 2006 with payment expected on or about
January 15, 2007.

In December 2006, the Companys subsidiary, Alico-Agri, Ltd. restructured two contracts in
connection with the sale of property in Lee County, Florida. The original contracts were entered
into in 2001 and 2003, respectively, for approximately 5,609 acres near Bonita Springs, Florida.
The Company received $7.5 million upon execution of the restructured agreements.

Under the terms of the first renegotiated contract, $3.8 million of the closing proceeds were
applied to the existing mortgage receivable principal of
$56.6 million. Four variable annual principal plus
interest payments of the remaining $52.8 million mortgage will commence with a payment of $13.6
million on September 28, 2007. The interest rate was renegotiated from 2.5% annually up to 4.0%
annually.

The second contract, for a gross sales price of $64.1 million, was renegotiated as a series of four
annual options with up to four time extensions. The first option will expire on September 28,
2007. In order to extend the time to exercise the option, the buyer must pay an annual extension
fee equal to 6% of the remaining unexercised sales price.

A third contract, for a gross sales price of $11.4 million, was renegotiated as a sales contract
with a purchase money mortgage. The mortgage consists of four annual payments of principal and
interest. The annual interest rate under the note is 6%. In order to obtain an extension on the
option contract, the sales contract must also be extended. There are up to four time extensions.
The first option will expire on September 28, 2007. In order to extend the time to exercise the
option, the buyer must pay an annual extension fee equal to 6% of the remaining unexercised sales
price.

Managements Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement

Some of the statements in this document include statements about future expectations. Statements
that are not historical facts are forward-looking statements for the purpose of the safe harbor
provided by Section 21E of the Exchange Act and Section 27A of the Securities Act. These
forward-looking statements, which include references to one or more potential transactions, and
strategic alternatives under consideration, are predictive in nature or depend upon or refer to
future events or conditions, are subject to known, as well as, unknown risks and uncertainties that
may cause actual results to differ materially from Company expectations. There can be no assurance
that any future transactions will occur or be structured in the manner suggested or that any such
transaction will be completed. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of future events, new information or otherwise.

When used in this document, or in the documents incorporated by reference herein, the words
anticipate, believe, estimate, may, intend, expect, should, could and other words
of similar meaning, are likely to address the Companys growth strategy, financial results and/or
product development programs. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements contained herein.
The considerations listed herein represent certain important factors the Company believes could
cause such results to differ. These considerations are not intended to represent a complete list of
the general or specific risks that may affect the Company. It should be recognized that other
risks, including general economic factors and expansion strategies, may be significant, presently
or in the future, and the risks set forth herein may affect the Company to a greater or lesser
extent than indicated.

LIQUIDITY AND CAPITAL RESOURCES:

Liquidity and Capital Resources

Working capital increased to $96.6 million at November 30, 2006 from $92.8 million at August 31,
2006. As of November 30, 2006, the Company had cash and cash equivalents of $28.4 million compared
to $25.1 million at August 31, 2006. Marketable securities decreased to $43.3 million from $50.1
million during the same period. The ratio of current assets to current liabilities increased to
7.43 to 1 at November 30, 2006 from 6.14 to 1 at August 31, 2006. Total assets decreased by $1.0
million to $261.8 million at November 30, 2006, compared to $262.8 million at August 31, 2006.

Management believes that the Company will be able to meet its working capital requirements for the
foreseeable future with internally generated funds. In addition, the Company entered into a credit
facility in fiscal year 2006 which increased its credit commitments to provide for revolving credit
of up to $175.0 million. Of the $175.0 million credit commitment, $117.0 million was available for
the Companys general use at November 30, 2006 (see Note 7 to condensed consolidated financial
statements).

Management expects continued profitability from the Companys agricultural operations. Citrus
operations are expected to remain profitable in fiscal year 2007. A smaller crop resulting from
hurricanes, citrus canker and land development has caused the unit price of citrus products to
increase and thus profits from the citrus division are expected to exceed those of the prior year.

The Company has implemented cost cutting measures in addition to improved crop rotation measures in
its sugarcane division; however, a large sugar beet crop is expected to result in lower prices for
finished sugar in fiscal year 2007, causing expectations for current year operations to be below
those of the prior fiscal year. The Companys cattle operations in fiscal year 2007 are expected
to remain profitable but at lower levels than in fiscal year 2006. Rains generated by Hurricane
Wilma kept many of the pastures overly wet and the conception rate of the cattle has been affected.
This will result in fewer calves for the Company to sell in fiscal year 2007 compared to fiscal
year 2006.

Plant World has expanded into several ornamental varieties with higher profit margins per unit. As
a result, Plant Worlds results are expected to improve in fiscal year 2007 and beyond as it begins
to fully scale up production of the new varieties.

Cash outlays for land, equipment, buildings, and other improvements totaled $2.8 million during the
quarter ended November 30, 2006, compared with $12.5 million during the three months ended November
30, 2005. In October 2005, the Company through Alico-Agri, purchased 291 acres of lake-front
property in Polk County, Florida, for $9.2 million.

In December 2006, the Companys subsidiary, Alico-Agri, Ltd. restructured two contracts in
connection with the sale of property in Lee County, Florida. The original contracts were entered
into in 2001 and 2003, respectively, for approximately 5,609 acres near Bonita Springs, Florida.
The Company received $7.5 million upon execution of the restructured agreements.

Under the terms of the first renegotiated contract, $3.8 million of the closing proceeds were
applied to the existing mortgage receivable principal of $56.6 million. Four annual principal plus
interest payments of the remaining $52.8 million mortgage will commence with a payment of $13.6
million on September 28, 2007. The interest rate was renegotiated from 2.5% annually to 4.0%
annually.

The second contract, for a gross sales price of $64.1 million, was renegotiated to a series of four
annual options with up to four annual extensions. The first option will expire on September 28,
2007. In order to extend the time to exercise the option, the buyer must pay an annual extension
fee equal to 6% of the remaining unexercised sales price.

A third contract, for a gross sales price of $11.4 million, was renegotiated as a sales contract
with a purchase money mortgage. The mortgage consists of four annual payments of principal and
interest. The annual interest rate under the note is 6%. In order to obtain an extension on the
option contract, the sales contract must also be extended. There are up to four time extensions.
The first option will expire on September 28, 2007. In order to extend the time to exercise the
option, the buyer must pay an annual extension fee equal to 6% of the remaining unexercised sales
price.

In November 2005, the Company sold approximately 280 acres of citrus grove land located south of
LaBelle, Florida in Hendry County for $5.6 million. The Company retained operating rights to the
grove until residential development begins.

The Company paid regular quarterly dividends of $0.275 per share on October 15, 2006. At its
September 2006 Board meeting, the Board declared a regular quarterly dividend of $0.275 per share
payable to shareholders of record as of December 29, 2006 with payment expected on or about January
15, 2007.

The Internal Revenue Service is examining the Companys tax returns for the years ended August 31,
2004, 2003, 2002, 2001 and 2000, and Agri tax returns for calendar years 2003, 2002, 2001 and 2000.
The examinations began in October 2003. Any assessments resulting from the examinations will be
currently due and payable.

The Internal Revenue Service (IRS) issued a thirty day letter dated August 14, 2006 pertaining to
ongoing audits of Alico for the tax years 2000 through 2004. The letter proposes changes to the
Companys tax liabilities for each of these tax years and required the Company either a) to agree
with the changes and remit the specified taxes and penalties or b) to submit a rebuttal within 30
days. The Company sought and received an extension of time to submit its protest and timely
submitted the protest on October 13, 2006.

In the thirty day letter, the IRS proposed several alternative theories as a basis for its argument
that Alico should have reported additional taxable income in the years under audit. These theories
principally relate to the formation and capitalization of the Companys Agri Insurance subsidiary
and its tax exempt status during the years under audit. Under the theories proposed, the IRS has
calculated additional taxes and penalties due ranging from a minimum of $35.4 million dollars to a
maximum of $86.4 million dollars. The letter does not quantify the interest on the proposed taxes;
however based on Company estimates, as of August 31, 2006 the interest on the additional taxes and
penalties ranges from $8.6 million to $27.6 million on the proposed adjustments.

The Company does not accept the IRS position and intends to continue to oppose vigorously any
attempt by the IRS to impose such assessment in connection with the Agri Insurance matter. See
also footnote 8 to the condensed consolidated financial statements. Should the IRS prevail in its
primary position, the effect would be to significantly reduce the liquidity of the Company, and
could cause the Company to default on several of its loan covenants.

Results of Operations

Three months ended

Summary of results (in thousands):

November 30,

2006

2005

Operating revenue

$

10,391

$

6,662

Gross profit (loss)

1,224

(4,853

)

General & administrative expenses

3,391

1,824

Loss from operations

(2,167

)

(6,677

)

Profit on sale of real estate



4,393

Interest and investment income

1,397

4,985

Interest expense

1,183

991

Other income (expense)

99

89

Provision for income taxes

$

(883

)

$

646

Effective income tax rate

47.6

%

35.9

%

Net (loss) income

$

(971

)

$

1,153

Overall, income from operations improved in the first quarter of fiscal year 2007 compared with the
first quarter of fiscal year 2006. Income from operations during the first quarter of fiscal year
2006 were impacted by a casualty loss of $5.7 million. Overall, net income decreased for the first
quarter of fiscal year 2007 when compared with the first quarter of fiscal year 2006, primarily due
to reduced real estate profits and lower interest and investment income when compared with the
prior year. Operations by segment are discussed separately below.

General and administrative expenses increased by 85.9% to $3.4 million in the first quarter of
fiscal year 2007 compared with $1.8 million for the first quarter of fiscal year 2006. Beginning
in the first quarter of fiscal 2007, the Company began accruing incentive bonuses quarterly. Prior
to the first quarter of fiscal year 2007, the Company had accrued incentive bonuses annually during
the fourth quarter of each fiscal year. This change caused compensation expense to increase during
the first quarter of fiscal year 2007 when compared with the first quarter of fiscal year 2006, but
is merely a timing difference that should reverse by the fourth quarter of fiscal year 2007.
Furthermore, subsequent to the first quarter of fiscal 2006, the Company has added several key
personnel, including a Chief Operating Officer, a Senior Vice President of Real Estate and a Senior
Vice President of Human Resources. The staff additions have caused salaries to increase when
compared to the first quarter of the prior fiscal year. Additionally, fees paid to consultants,
including engineering firms used to evaluate the Companys properties, increased substantially
during the first quarter of fiscal year 2007 compared with the first quarter of fiscal year 2006.
Insurance and donations also increased during the first quarter of fiscal year 2007 when compared
with the first quarter of fiscal year 2006, as did general and administrative costs related to the
Companys Bowen Brothers subsidiary, and director fees.

Profit from the Sale of Real Estate

The Company did not sell any real estate during the first quarter of fiscal year 2007. In the
first quarter of fiscal year 2006, the Company sold a 280 acre citrus grove located near LaBelle,
Florida in Hendry County for $5.6 million cash for a net gain of $4.4 million. The Company has
retained operating rights to the grove until residential development begins.

Provision for Income taxes

The effective tax rate for the first quarter of fiscal year 2007 was 47.6% compared with 35.9% for
the first quarter of fiscal year 2006. The rate for the first quarter of fiscal year 2007 was
impacted by an adjustment of the tax contingency previously accrued (see Note 8 to the consolidated
financial statements).

Interest and Investment Income

Interest and investment income is generated principally from investments in corporate and municipal
bonds, mutual funds, U.S. Treasury securities, and mortgages held on real estate sold on the
installment basis.

In accordance with guidelines established by the Companys Board of Directors, the Company
restructured its investment portfolio during the first quarter of fiscal year 2006, focusing on
high quality fixed income securities with original maturities of less than 12 months. These sales
resulted in net realized gains of $3.3 million in the first quarter of fiscal year 2006.

Interest expense increased during the first quarter of fiscal year 2007 when compared with the
first quarter of fiscal year 2006 due to higher interest rates and debt levels. The majority of the
Companys borrowings are based on the London interbank offered rate (LIBOR). The LIBOR increased by
approximately 1.05% during the year to 5.35%.

Three months ended

November 30,

2006

2005

Revenues

Agriculture:

Bowen Brothers Fruit

$

804

$



Citrus groves

1,637

1,208

Sugarcane

1,696

1,428

Cattle

4,074

2,224

Alico Plant World

588

521

Vegetables

411



Sod

399

558

Native trees and shrubs

159

45

Agriculture operations revenue

9,768

5,984

Real estate activities



25

Land leasing and rentals

243

417

Mining royalties

380

236

Total operating revenue

$

10,391

$

6,662

Operating revenues increased by 56% to $10.4 million for the first quarter of fiscal year 2007
compared with $6.7 million for the first quarter of fiscal year 2006. The increase was primarily
due to increased revenues from the Companys Cattle division, and revenues generated by the
Companys Bowen subsidiary, which was purchased during the second quarter of fiscal 2006.

Gross profit increased to $1.2 million during the first quarter of fiscal year 2007 compared with a
loss of $4.9 million during the first quarter of fiscal year 2006. The prior year gross profit
was largely impacted by a net casualty loss of $5.7 million related to damages incurred due to
citrus disease and hurricane damages.

Agricultural Operations

Agricultural operations generate a large portion of the Companys revenues. Agricultural
operations are subject to a wide variety of risks including weather and disease. Additionally, it
is not unusual for agricultural commodities to experience wide variations in prices from year to
year or from season to season.

Bowen

Bowens operations generated revenues of $.8 million and a loss of $0.2 million during the first
quarter of fiscal year 2007. By utilizing Bowen to harvest the Companys fruit during fiscal year
2007, the Company was able to reduce its citrus harvesting costs from the market rates it paid in
prior years. The normal profit margin on intercompany harvesting was eliminated from Bowens
results, and the cost savings has been reflected in the Companys Citrus Grove segment.

Citrus Groves

The Citrus Groves division recorded gross profits of $0.7 million and $0.6 million, and gross
revenues of $1.6 million and $1.2 million for the quarters ended November 30, 2006 and 2005,
respectively. The fiscal year 2007 crop forecast by the USDA indicates that the supply of Florida
oranges will be lower than fiscal year 2006 which should allow for continued strong prices. The
USDA forecast is for 135.0 million boxes for fiscal year 2007 compared with production of 147.9
million boxes in fiscal year 2006. This reduced crop has resulted in higher per unit prices for
citrus in the first quarter of fiscal year 2007 when compared with the same period last year. The
Company estimates that its fiscal year 2007 crop will be approximately 3.5 million boxes compared
with 3.3 million boxes for fiscal year 2006.

Sugarcane generated losses of $0.4 million and $.8 million during the first quarter of fiscal years
2007 and 2006, respectively. Sugarcane revenues were $1.7 million and $1.4 million during the
first quarter of fiscal years 2007 and 2006, respectively. A large sugar beet crop is expected to
result in lower prices for finished sugar during fiscal year 2007 when compared with fiscal year
2006.

During fiscal year 2006, the Company performed an extensive analysis of yields based on the age of
planted cane, the variety and the historical production of each sugarcane plot. Based on this
analysis, the Company determined on a plot by plot basis, the extent of caretaking each plot would
receive. In some instances, a decision was made to place plots on a reduced care program until the
plot could be harvested and replanted. The expected result of this analysis is that the Companys
sugarcane crop will be further reduced in fiscal year 2007; however, it is also expected that the
unit cost per ton will also be reduced, and that per acre yields will gradually improve to prior
historical levels beginning in fiscal year 2008. The Company is committed to producing the maximum
return per acre on the acreage currently being used for sugarcane production and will continue to
explore alternatives in order to meet this goal.

Cattle

Gross profits from the sale of cattle were $0.5 million and $0.5 million for the quarters ended
November 30, 2006 and 2005, respectively. Cattle revenues were $4.1 million and $2.2 million over
the same periods. The eye of Hurricane Wilma, a category 3 hurricane, passed over Alicos cattle
ranch on October 24, 2005, generally stressing the cattle herd. In its aftermath, many of the
Companys cattle pastures were underwater for an extended period. Due to the stress of the
hurricane and a temporary reduction in nutrition, the number of calves born in fiscal 2006 was
reduced approximately 5% from the previous year. Furthermore, early estimates are that the fiscal
year 2007 calf crop may be reduced by up to 10% of the fiscal 2006 level. In an effort to improve
conception and general nutrition, the Company is reducing its cattle herd.

Plant World

During the first quarter of fiscal year 2007, Plant World generated gross revenues of $0.6 million
compared with $0.5 million of revenues during the first quarter of fiscal year 2006. Plant Worlds
operations generated a profit of $0.2 million in the first quarter of fiscal year 2007 compared
with a loss of $0.4 million for the first quarter of fiscal year 2006. In the first quarter of
fiscal year 2007, Plant World began expanding its product lines to include several ornamental
varieties with higher profit margins per unit. As a result, Plant Worlds results are expected to
improve in fiscal year 2007 and beyond as it begins to fully scale up production of the new
varieties.

Vegetables

Alico began farming sweet corn and green beans in the first quarter of fiscal year 2006. The
Company planted 250 acres of corn and 250 acres of green beans in the fall of both 2005 and 2006.
The first crops were totally devastated by hurricane Wilma in October 2005 and had to be replanted.
During the first quarter of fiscal year 2007, the Vegetable division generated $0.4 million of
revenue and posted a loss of $0.3 million. Poor prices for corn during the first quarter of fiscal
year 2007 caused the Company to recognize a loss on its fall crop.

The Sod division generated revenues of $0.4 million during the first quarter of fiscal year 2007,
yielding a gross profit of $0.2 million, compared with revenues of $0.6 million and gross profit of
$0.1 million during the first quarter of fiscal year 2006. The Company is currently developing an
additional 500 acres of cultivated sod which will become available for sale by the first quarter of
fiscal year 2008.

Off Balance Sheet Arrangements

The Company through its wholly owned subsidiary Bowen Brothers Fruit, LLC enters into purchase
contracts for the purchase of citrus products during the normal course of its business. Typically,
these purchases are covered by forward sales contracts. The total purchase contracts under these
agreements totaled $18.7 million at November 30, 2006. All of these purchases except for $2.4
million were covered by sales agreements at prices exceeding cost. Early in the harvest season,
Bowen usually does not
contract to sell 100% of the contracted purchase quantity because actual harvest may be less than
the contracted purchase quantity. As the harvest season progresses, Bowen will adjust the sales
commitment. Bowen currently believes that all committed purchases can be sold at a profit. All of
these contracts will be fulfilled by the end of the fiscal year 2007.

Disclosure of Contractual Obligations

The contractual obligations of the Company at November 30, 2006 are set forth in the table below:

Less than

1 - 3

3-5

5 +

Contractual obligations

Total

1 year

years

years

years

Long-term debt

$

69,410

$

3,332

$

2,614

$

60,508

$

2,956

Expected interest on debt

18,207

4,640

8,736

4,521

310

Commissions

2,833

803

1,334

696



Citrus purchase contracts

18,691

18,691







Retirement benefits

5,962

924

672

672

3,694

Deferred taxes

15,122

315

10,506

3,456

845

Other non-current liability (a)

20,685



20,685





Equipment additions

153

153







Real Estate contract obligations

553

553







Purchase obligations (donation)

795

795







Leases  operating

914

221

475

218



Total

$

153,325

$

30,427

$

45,022

$

70,071

$

7,805

(a)

This obligation represents a contingency accrual related to income taxes. See note 8 to
the condensed consolidated financial statements.

The preparation of the Companys financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America requires Management to
make estimates and judgments that affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis,
Management evaluates the estimates and assumptions based upon historical experience and various
other factors and circumstances. Management believes that the estimates and assumptions are
reasonable in the circumstances; however, actual results may vary from these estimates and
assumptions under different future circumstances. The critical accounting policies that affect the
more significant judgments and estimates used in the preparation of the consolidated financial
statements are discussed below.

Based on fruit buyers and processors advances to growers, stated cash and futures markets,
together with combined experience in the industry, Management reviews the reasonableness of the
citrus revenue accrual. Adjustments are made throughout the year to these estimates as relevant
information regarding the citrus market becomes available. Fluctuation in the market prices for
citrus fruit has caused the Company to recognize a decrease in revenue from the prior years crop
totaling $20 thousand for the three months ended November 30, 2006, and an increase in revenue of
$418 thousand for the three months ended November 30, 2005.

In accordance with Statement of Position 85-3 Accounting by Agricultural Producers and
Agricultural Cooperatives, the cost of growing crops (citrus and sugarcane) are capitalized into
inventory until the time of harvest. Once a given crop is harvested, the related inventoried costs
are recognized as cost of sales to provide an appropriate matching of costs incurred with the
related revenue earned. The inventoried cost of each crop is then compared with the estimated net
realizable value (NRV) of the crop and any costs in excess of the NRV are immediately recognized as
cost of sales.

The Internal Revenue Service (IRS) issued a thirty day letter dated August 14, 2006 pertaining to
ongoing audits of Alico for the tax years 2000 through 2004. The letter proposes changes to the
Companys tax liabilities for each of these tax years and required the Company either a) to agree
with the changes and remit the specified taxes and penalties, or b) to submit a rebuttal within 30
days. The Company sought and received an extension of time to submit its protest and timely
submitted the protest on October 13, 2006.

In the thirty day letter, the IRS proposed several alternative theories as a basis for its argument
that Alico should have reported additional taxable income in the years under audit. These theories
principally relate to the formation and capitalization of the Companys Agri Insurance subsidiary
and its tax exempt status during the years under audit. Under the theories proposed, the IRS has
calculated additional taxes and penalties due ranging from a minimum of $35.4 million dollars to a
maximum of $86.4 million dollars. The letter does not quantify the interest on the proposed taxes.

The Company does not accept the IRS position and intends to continue to oppose vigorously any
attempt by the IRS to impose such assessment in connection with the Agri Insurance matter. However,
because Management believes it is probable that a challenge will be made and probable that the
challenge may be successful as to some of the assertions, Management has provided for the
contingency. The Company has accrued a liability of $20.7 million and $20.3 million as of November
30, 2006 and August 31, 2006, respectively, for the contingency.

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

Reference is made to the discussion under Part II, Item 7A Quantitative and Qualitative
Disclosures about Market Risk in the companys 2006 Annual Report on Form 10-K for the fiscal year
ended August 31, 2006.There are no material changes since the Companys disclosure of this item on
its last annual report on Form 10-K.

The Company maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, referenced herein as the Exchange
Act. These disclosure controls and procedures are designed to ensure that information required to
be disclosed by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified in the SECs rules
and forms, and that such information is accumulated and communicated to Companys management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company carried out, under the supervision and with
the participation of the Companys management, including the Companys Chief Executive Officer and
the Companys Chief Financial Officer, an evaluation of the effectiveness of the design and
operation of the Companys disclosure controls and procedures performed pursuant to Rule 13a-15
under the Securities Exchange Act of 1934 as amended. For the fiscal year ended August 31, 2005,
the Companys Chief Executive Officer and its Chief Executive Officer determined that that a
material weakness existed by reason of inadequate staffing in the Companys accounting department.
The Company took various steps to correct this weakness during the 2006 fiscal year but based on
their evaluation at the end of 2006, the Companys Chief Executive Officer and its Chief Financial
Officer concluded that, as of August 31, 2006 and
November 30, 2006, the Companys disclosure controls and procedures continued to be not effective.

Material Weakness Related to Tax Accounting

Management assessed the effectiveness of the Companys internal control over financial reporting as
of August 31, 2006. In making the assessment, Management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control 
Integrated Framework. Based on this assessment, the Management of Alico, Inc. concluded that a
material weakness continued to exist in the Companys internal control over financial reporting as
of August 31, 2006 as a result of a significant deficiency discovered in connection with the
preparation of the year end financial statements. Although the amount of the adjustments made to
the Companys accounts would ordinarily have resulted in a significant deficiency the Company
concluded that a material weakness continues to exist in the internal controls over financial
reporting, because the remedial actions taken during fiscal 2006 were not effective at August 31,
2006 to prevent the significant deficiency, which in this context amounted to a material weakness.
A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.

Although improvements were made to the internal controls over financial reporting during fiscal
2006, a significant deficiency existed in the following area:

Adjustments to the Companys income tax provision and deferred taxes were identified by the
Companys auditors based on the results of the annual financial statement audit for the fiscal year
2006. The adjustments resulted from a deficiency in the operation of internal controls around the
deferred tax roll forward, specifically related to the contribution carry-forward, property, plant
and equipment, and the income tax provision calculation.

The entries to correct and properly reflect the income tax balances were made and incorporated into
the fiscal 2006 year end financial statements and Management does not believe that there are any
misstatements in the financial statements.

Although the Company does not believe that the significant deficiency identified impacted any
previously filed financial statements, the Chief Executive Officer and the Chief Financial Officer
believe that the existence of the deficiency or deficiencies of the magnitude reported following
the determination that a material weakness existed in the previous year means that the material
weakness identified in 2005 is
continuing and is an indication that there continues to be more than a remote likelihood that a
material misstatement of the Companys financial statements will not be prevented or detected in a
future period.

In conducting Alicos evaluation of the effectiveness of its internal control over financial
reporting, Alico has excluded the acquisition of Bowen Brothers, which was completed by Alico
during the second quarter of fiscal 2006. Bowen Brothers represented approximately 1% of Alicos
total assets as of August 31, 2006 and approximately 33%, of Alicos total revenues for the year
then ended. Companies are allowed to exclude acquisitions from their assessment of internal
control over financial reporting during the first year of an acquisition while integrating the
acquired company under guidelines established by the Securities and Exchange Commission.

Remediation of Prior Years Material Weakness

Subsequent to the year ended August 31, 2005, the Company added a qualified and experienced
financial reporting manager in the Accounting Department to improve the depth, skills, and
experience within the department to prepare its financial statements and disclosures in accordance
with generally accepted accounting principles. In addition, management improved the documentation
of and training on accounting policies and procedures to further improve internal controls over
financial reporting. These changes however, were not sufficient to prevent the occurrence of the
deficiency noted above and indicate that the material weakness is continuing. Subsequent to August
31, 2006, the Company has hired an additional experienced CPA and a staff accountant in response to
its staffing problems. The Company is actively recruiting additional qualified and experienced
staff in its ongoing commitment to correcting this material weakness.

Managements Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Exchange Act as a process designed by, or under the supervision of, the
Companys principal executive and principal financial officers and implemented by the Companys
board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes those polices and
procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with Generally Accepted Accounting Principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the companys assets that could have a material effect on the financial
statements.

As a result of the continuation of the material weakness described above, Management has concluded
that as of November 30, 2006 and August 31, 2006, the Company did not maintain effective internal
control over financial reporting.